There's A Flaw In Apple's 'Fall Transition' Explanation For Lighter Than Expected iPhone Sales

Tim Cook Apple WWDC 2012

Photo: Justin Sullivan/ Getty Images

On last night’s earnings call, Apple summed up its relatively weak report with two words: “Fall transition.”CEO Tim Cook and CFO Peter Oppenheimer repeatedly hinted people held off on buying an iPhone because of a “fall transition” to a new product. That’s Apple secretspeak for a new iPhone, which is expected in September or October.

It’s an easy to follow story line, so most people are accepting it at face value. However, Walter Piecyk at BTIG thinks there are bigger problems with the iPhone than just a “fall transition.”

In a new note, he points out that rumours about a new iPhone in the fall were just as rampant last year as they are this year. He clipped out a bunch of headlines, and he’s been tweeting the stories, too.

Despite the ramp of rumours last year, Apple delivered sequential iPhone growth from its second quarter to its third quarter. This year, though, there was a decline in iPhone sequential iPhone sales for Q3.

We think that part of this has been driven by Apple’s schedule being rearranged. It released the iPhone 4S in the holiday quarter, which is Apple’s first fiscal quarter of the year. Then in its second quarter, Apple released the 4S in China. That led to two monster sized quarters. It also makes year to year comparisons pretty tough.

It’s entirely possible that this is just the new normal for Apple. It could just release the iPhone in the fall, then rack up big sales for two quarters before settling back to smaller sales.

Even if that’s true, Piecyk sees risks for investors.

He’s warning that sell side analysts might stack their iPhone predictions for the holiday quarter so high that Apple can’t beat them. What happens if analysts see slow iPhone sales for the middle of the year, and decide to jack their iPhone estimates to 60 million for the holiday quarter? If Apple sells 50 million phones, which would be massive, it would still be a let down.

Putting aside the seasonality discussion, Piecyk believes there is a huge trend that is disrupting the iPhone business and most people are ignoring it.

In the U.S., carriers are doing all they can to stop iPhone owners from upgrading their phones. They want people to buy a phone, then use it forever, that way they pay less to Apple and make more money on each user.

This is the key section from Piecyk:

We believe that AT&T would have seen no sequential decline in iPhone sales in the June quarter had it not implemented its stricter upgrade policy.  AT&T’s  record low phone upgrade rate of 6% in calendar Q2 compared to over 8% last year.  Quite simply, had AT&T’s upgrade rate remained at 8%, the company would have sold 800,000 more iPhones and matched or even topped the iPhone sales it generated in the March quarter.

There are three more quarters of the impact of the tighter upgrade policy including calendar Q4, when the next iPhone is widely expected.  As we discussed in a prior post, we expect a majority of AT&T’s iPhone customers will not qualify for an upgrade/subsidy in that quarter and as AT&T Wireless CEO Ralph de la Vega later told us, very few customers have been opting to buy out their contract to get an early upgrade.

That’s in the U.S. What about the rest of the world?

Piecyk believes the iPhone is just too expensive. He thinks Apple will have to release a less expensive phone to address the prepaid markets around the world. And it probably shouldn’t be the iPhone 3GS. He asks, “does a three year old phone really attract aspirational brand purchasing when brand new models are being launched with Android and potentially Windows 8?”

So, you can explain some of Apple’s iPhone miss on the “fall transition,” but it looks like there could be bigger problems for Apple to tackle if it wants to return to those spectacular growth rates.

Basically, we’re going to have to wait two quarters to figure out where Apple’s business is going. If it comes back with a monster in the holiday quarter, then this is the new normal. But if it misses again, then all that talk of Apple becoming a $1 trillion company will have to shelved.

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